US Senators Propose Executive Compensation Tax

by Leroy Baker, Tax-News.com, New York

19 March 2009

The US Senate Finance Committee has announced the core principles of a proposal to "discourage" excessive compensation by companies that have taken taxpayer funds, and recoup payments made to executives at troubled financial services giant American International Group (AIG).

The proposed measure, announced by committee chairman Max Baucus and ranking Republican Chuck Grassley, would impose a 35% tax on all retention bonuses and all other bonuses over USD50,000. Companies would be responsible for paying the excise tax due from foreign employees if the tax cannot be collected through normal withholding.

According to Baucus and Grassley, safeguards would be provided in the legislation that would prevent companies from characterizing bonus payments as salaries to avoid the tax.

The legislation would apply to all Troubled Assets Relief Program (TARP) recipients of government funds as well as companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac. The excise tax would apply to all retention bonuses or other bonuses earned or paid beginning on January 1, 2009, and continuing through the period during which the company retains TARP funds.

Additionally, the legislation would place a USD1m limit on non-qualified deferred compensation, meaning that a taxpayer cannot defer more than USD1m in a 12 month period. If this limit - which would be indexed for inflation - is breached, then compensation deferred under all non-qualified deferred compensation plans covering the taxpayer (including compensation deferred in previous years) would be taxable and such deferred amounts would be subject to a 20% penalty tax and interest payment. However, interest and earnings on compensation deferred during the 12 month period would not be counted against the USD1m limit, so long as the earnings are based on a “market rate” of return.

The legislative proposals were made by Baucus and Grassley in response to reports that AIG is to use money received through the TARP to pay executive bonuses - a decision that has "outraged" Baucus, who was a primary architect of provisions limiting executive pay and 'golden parachutes' to TARP recipients in the original bill.

"The argument in defense from AIG is that this is retention pay, not executive bonuses. Well, I’m not buying it,” said Baucus shortly before announcing the new tax proposals.

“We need to stop this nonsense," an indignant Baucus continued. "There are enough bright people in this country that would do the job for an honest salary, and enough honest taxpayers demanding that we put an end to this stuff. You can bet I’ll make sure justice is served.”

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